Skip to Content

section header ETF fundamentals

subsection header Strategies

Active/passive combinations

Actively managed investments offer an opportunity for outperformance, but they also bring greater relative risk and unpredictability.

Low-cost passively managed investments typically reflect the risk and return characteristics of a given market segment but do not offer the opportunity for outperformance. Combining low-cost active funds and ETFs with index-based ETFs can achieve a balance between the two approaches.


Core-satellite approach

One way to do this is with a "core-satellite" strategy that employs indexing at the core of a portfolio and actively managed funds as satellites. This idea recognizes the differences between indexing and active management and combines the best aspects of both approaches.

The index core provides a risk-controlled, low-cost way to capture market returns (beta) over the long-term, while the actively managed satellites provide an opportunity for market outperformance (alpha).

Active approach Index approach
  • Seeks to outperform
  • Higher costs
  • Higher manager risk
  • Shorter-term focus
  • Lower potential tax efficiency
  • Seeks market return
  • Lower costs
  • Lower manager risk
  • Long-term focus
  • Higher potential tax efficiency


Core-satellite methodology

The conventional view of core-satellite methodology (Figure 1) suggests that it’s prudent to use index funds for markets that are deemed efficient, such as large-cap stocks. This view holds that actively managed funds make more sense to use in areas of the market that are considered to be inefficient, such as small-cap or emerging market stocks. The thinking here is that active managers are more likely to succeed in these areas.


Figure 1

Source: Vanguard. This hypothetical investment or portfolio strategy is shown for illustrative purposes only and shall not be construed as a recommendation to buy or sell any security or financial instrument, or an offer or recommendation to participate in any particular trading or investment strategy.

An alternative view of core-satellite investing (Figure 2) suggests that indexing is a powerful investment strategy in all market segments. As a result, the active/index decision should be predicated on an investor’s ability to identify low-cost, talented managers, not on the indiscriminate selection of active managers in apparently inefficient market areas. This view holds that skill in selecting active managers drives the success of a core-satellite portfolio.


Figure 2

Illustration showing broad international bond and stock market index ETFs at the core of a portfolio with three different active manager products as satellites.

Source: Vanguard. This hypothetical investment or portfolio strategy is shown for illustrative purposes only and shall not be construed as a recommendation to buy or sell any security or financial instrument, or an offer or recommendation to participate in any particular trading or investment strategy.


Points to consider

  • There is no guarantee that a combined active/passive approach will be less risky than an all-active or all-index approach and will achieve comparable returns.
  • Whether they choose active or passive funds, investors should consider funds that have low overall costs to increase the probability of long-term success. Costs directly detract from investment returns.


Learn the basics of ETFs, including their history, how they compare to mutual funds, what types are available and more.



Learn about the advantages of indexing, how ETFs are indexed, the differences between excess return and tracking error, and more.



Learn how ETFs trade, where they get liquidity, common order types, how premiums and discounts work and more.

Your use of this site signifies that you accept our terms and conditions of use and privacy policy.

© 2022 VIGM, S.A. DE C.V. Asesor en Inversiones Independiente (“Vanguard Mexico”). All rights reserved.

This website is for institutional and sophisticated investors only. Vanguard Mexico will not have any responsibility for the use given to the information contained in this website.

Vanguard Mexico registration number: 30119-001-(14831)-19/09/2018. The registration of Vanguard Mexico before the Comisión Nacional Bancaria y de Valores (“CNBV”) as an Asesor en Inversiones Independiente is not a certification of Vanguard Mexico’s compliance with regulation applicable to Advisory Investment Services (Servicios de Inversión Asesorados) nor a certification on the accuracy of the information provided herein. The supervision scope of the CNBV is limited to Advisory Investment Services only and not all services provided by Vanguard Mexico.

The content of this website is solely for informational purposes and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, nor shall any such securities be offered or sold to any person, in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities law of that jurisdiction. Reliance upon information in this website is at the sole discretion of the recipient.

Securities information provided in this website must be reviewed together with the offering information of each of the securities which may be found on Vanguard’s website: or

Vanguard Mexico may recommend products of The Vanguard Group Inc. and its affiliates, and such affiliates and their clients may maintain positions in the securities recommended by Vanguard Mexico.

The information contained in this website derived from third-party sources is deemed reliable, however Vanguard Mexico and The Vanguard Group Inc. are not responsible and do not guarantee the completeness or accuracy of such information.

You may leave Vanguard South America’s website when you access certain links on this website. In so doing, you may be proceeding to the site of an organization that is not regulated under the Mexican regulation. Vanguard Mexico has not examined any of these websites and does not assume any responsibility for the contents of such websites nor the services, products or items offered through such websites.

The information contained in this website should not be considered as an investment recommendation, a recommendation can only be provided by Vanguard Mexico upon completion of the relevant profiling and legal processes.

This website is for educational purposes only and does not take into consideration your background and specific circumstances nor any other investment profiling circumstances that could be material for taking an investment decision. We recommend getting professional advice based on your individual circumstances before taking an investment decision.

The information contained herein does not constitute an offer or solicitation and may not be treated as such in any jurisdiction where such an offer or solicitation is against the law, or to anyone for whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.